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PIMCO Sales Move Is Business--Not Investor--Driven

Don't confuse gold mutual funds with gold, plus more ...

Morningstar Fund Analysts, 09/09/2011

Earlier this week, Allianz SE AZSEY let its PIMCO subsidiary take control of the foreign distribution of its own funds after having shared it with another Allianz unit. The move is driven more by business than investor interests.

PIMCO already had been moving toward a global takeover of its fund distribution. Earlier this year, the firm formally took over its U.S. retail-fund distribution from Allianz and began to develop its own salespeople from former Allianz sales staff. Before that, PIMCO depended on the Allianz salesforce to sell its products through noninstitutional channels in addition to Allianz's own fund offerings.

It's likely that, in part, the bond giant's move is an attempt to maintain sharp asset growth in its new stock offerings. PIMCO held about $10 billion in assets across U.S.-sold equity funds as of July 31, 2011, compared with $5 billion a year ago, shortly after a spring 2010 launch. Meanwhile, PIMCO's equity funds have grown almost a hundredfold in Europe since June 30, 2010, and it now has roughly 1 billion euros in its European equity funds. As PIMCO began to expand from its traditional fixed-income expertise, its actively managed equity funds began to overlap with Allianz products. Now, however, PIMCO's funds won't face internal competition considering that Allianz will be selling its wares through an entirely separate and dedicated wholesaling operation.

PIMCO could experience some modest cost savings from integrating its international distribution. Combined with a greater asset base, the move eventually could justify lower fund fees for investors. Historically, however, PIMCO has not been quick to pass along economies of scale to shareholders.

One investor headache is that many clients with both Allianz and PIMCO funds will now have to deal with two firms instead of one. Meanwhile, this week PIMCO filed to launch two equity income funds to be managed by Brad Kinkelaar, Cliff Remily, and Matt Burdett, formerly of Thornburg. PIMCO has big ambitions for its equity funds; however, if the firm's overall distribution strategy is too focused on asset-gathering, it could weaken the firm's investment culture.

High Gold Prices Don't Ensure Shining Returns for Precious-Metals Funds
Gold prices have been on a tear this year. The SPDR Gold Shares GLD, which tracks the daily price of gold bullion, is up 28% year to date. Despite the rally in gold prices, equity precious-metals funds have both underperformed the gold exchange-traded fund on average (the category has gained 2.7% year to date) and posted a wide range of returns.

A number of factors are behind the disparity between gold prices and the returns of equity precious-metals funds, starting with the fact that the funds invest in stocks of commodity producers and not in the commodity itself. An investment in these stocks will reflect the operating risks of the firms. Mining involves labor and equipment costs, as well as geopolitical risk. Also, not all mining companies focus on gold, which would generate deviation between their stock performance and gold prices. The equity precious-metals category overview gives some more detail on the variance between gold prices and mining-stock performance.

A look at the top- and bottom-performing equity precious-metals funds year to date is also a good illustration of how corporate-operating risk affects the returns of equity precious-metals funds. The top performer, First Eagle Gold FEGIX, has gained 9.9%. The fund's hefty stake in gold bullion and its tilt toward more established gold-mining companies boosted its performance in the past nine months. The bottom performer, U.S. Global Investors World Precious Minerals UNWPX, has lost 14.5% year to date. The fund is full of upstart mining companies, many of which have been battered since the beginning of this year.

Touchstone and Old Mutual?
Reports that Touchstone Investments is in talks to buy Old Mutual's retail-fund business may raise questions for their fund investors, though neither Touchstone nor Old Mutual is commenting on the reports.

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